FDIC Presses Institutions To Boost Loss Reserves For Juniors

Posted by Orb Staff on August 04, 2009 No Comments
Categories : Mortgage Servicing

deral Deposit Insurance Corp. (FDIC) is [link=http://www.fdic.gov/news/news/financial/2009/fil09043.html]urging[/link] the institutions it regulates to reexamine loss reserves for home equity loans. In a letter Monday, the FDIC told financial institution managers to consider ‘changes in economic and business conditions and other developments that affect the collectibility ofâ�¦junior-lien loans.’ Among the factors that should be accounted for when determining loss reserves are changes in the repayment status of junior-lien borrowers' loans secured by first liens on the same one-to-four-family residential properties; changes in the value of the junior-lien borrowers' underlying real estate collateral and the institution's policies regarding the initiation of foreclosure action on junior-lien loans; and the submission of bids on foreclosure sales initiated by more senior lienholders when the value of the underlying real estate collateral is insufficient to adequately protect the institution's junior-lien position. The FDIC specifies that institutions also need to consider the volume of senior-lien loan modifications that represent troubled debt restructurings, regardless of whether the junior-lien loans themselves are current or past due. "[T]he failure to timely recognize estimated credit losses could delay appropriate loss mitigation activity, such as restructuring junior-lien loans to more affordable payments or reducing principal on such loans to facilitate refinancings," the letter adds. "Examiners will continue to evaluate the effectiveness of an institution's loss mitigation strategies for loans as part of their assessment of the institution's overall financial condition." Last month, the chairs of the two congressional banking committees, Sen. Chris Dodd, D-Conn., and Rep. Barney Frank, D-Mass., [link=http://banking.senate.gov/public/index.cfm?FuseAction=Newsroom.PressReleases&ContentRecord_id=746e6555-c921-401a-c4bd-cb5300419089&Region_id=&Issue_id=][u]co-authored[/u][/link] a letter to bank regulators, including FDIC Chair Sheila Bair, asking them to address the issue of overvalued seconds. "Inadequate reserving would also overstate the capital position of these institutions at a time when an accurate picture of the capital adequacy of the banking system is crucial," Dodd and Frank wrote. SOURCES: [link=http://www.fdic.gov]FDIC[/link], [link=http://banking.senate.gov/]Senate Banking Committee

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